Remarks About the National Financial Capability Study

As prepared for delivery.

Thank you, Doug [Guthrie], and thanks to everyone for joining us today. I am very excited to be here to release the findings of the 2012 National Financial Capability Study. And I'm equally excited to be doing so at George Washington University's Global Financial Literacy Excellence Center. The Center played a large role in this study and does tremendous work to improve financial capability in the U.S. and around the world.

When we conducted the first wave of the study in 2009, we set out to create a benchmark to measure the progress Americans have made in improving their financial futures. Now with the 2012 study, we are seeing some interesting changes in key measures of financial capability—some that are encouraging and others that tell us we have a lot more work to do. The study also serves as an invaluable resource for tracking trends, and today I would like to share a few of them with you and talk about some new questions that we added to the 2012 version.

But first, I want to acknowledge our partners. The National Financial Capability Study is a huge undertaking—one that the FINRA Investor Education Foundation could not accomplish without the help of a talented group of stakeholders. We are very grateful to the team for their insights and assistance. As with the 2009 study, the Treasury Department played a large role. This wave of the study was done in consultation with President Obama's Advisory Council on Financial Capability, and we were also assisted by other agencies, organizations and researchers, including our friends at the Consumer Financial Protection Bureau and the Securities and Exchange Commission.

Over the last three years, the study has made its mark in the financial literacy world and beyond. The data has been used in more than 20 publications to date—ranging from peer-reviewed journals to white papers and issue briefs. And this number continues to grow. Stories in major media outlets as well as government reports and congressional testimony regularly cite the statistics. Further, the data have been used in international comparisons of financial literacy—so it has helped researchers and policy makers gain a better understanding of how the United States compares to other countries in terms of understanding important financial concepts like compounding, investment risk and inflation. We are looking forward to seeing how the 2012 data will be used to further our understanding of financial capability—both on its own and in conjunction with the 2009 data.

So what have we learned from the 2012 study? First, some good news. Financial capability in the United States has improved in important areas. People are finding it a little easier to make ends meet. Significantly more respondents have rainy-day funds, which puts them in a better position to deal with life's unexpected events. The slowly improving economic environment has helped in some areas. Nearly a quarter told us they are satisfied with their personal finances—up from 16 percent in 2009.

But there are still concerns. Debt, for example, continues to be a problem. More than 40 percent of the respondents believe they have too much debt. Clearly, many are not comfortable with this aspect of their financial lives. Although the percentage of credit card holders carrying debt on their cards has declined from 56 percent to 49 percent, nearly half still carry debt and pay interest on their balance. And about 10 percent use their cards for cash advances.

And issues of debt extend well beyond credit cards. When it comes to homeownership, 22 percent of those who have a mortgage indicated that they owe more on their home than they believe it is worth. We also asked respondents about medical bills and student loans. Twenty-six percent have unpaid medical bills that are past due. The number is even higher—31 percent—among 18 to 34 year olds. As for student loans, 20 percent of all respondents—and 36 percent of 18 to 34 year olds—report having student loan debt. More than half of respondents with student loan debt are concerned that they will not be able to pay it off.

That sense of concern about debt appears to be pervasive. One fascinating finding of the study is that self-reported feelings of being overwhelmed by debt change very little across income brackets. In other words, no matter how much income they earn, a significant number feel they have too much debt.

We took a deeper look at this issue and found that all debts are not created equal—at least in terms of how different forms of debt correlate with respondents' perceptions about it. Medical debt, credit card debt and student loans are strongly related to perceptions of debt—whereas mortgage debt and auto loans appear to have a weaker relationship. As the United States wrestles with its debt crisis, insights like this—and others that can be drawn from the study—could prove useful to both practitioners and policy makers.

Related to debt is another important concept that researchers have been examining in recent years called financial fragility. Financial fragility is the lack of liquidity to deal with an unexpected challenge, like a major car or housing repair. When asked if they would be able to come up with $2,000 if an unexpected need arose in the next month, nearly 40 percent respondents said they probably or certainly could not. And among low- to moderate-income respondents, the number rose to nearly 70 percent. This finding sheds light on the precarious financial condition of many U.S. households.

Another important area that the study tracks is the level of financial literacy across the country. Financial literacy remained flat, or even slightly down by some measures. In 2009 respondents could correctly answer three of five questions on a financial literacy quiz, and in the 2012 study that number held steady. However, another way to look at it is that we classified 42 percent of the respondents in 2009 as having high financial literacy—meaning they could answer four or five of the five questions correctly. In 2012, the percent of respondents classified as having high financial literacy dropped slightly to 38 percent.

However, we also found some encouraging signs about financial literacy. For example, as with 2009 wave, the study shows that financial literacy correlates strongly with behavior that is indicative of financial capability. Specifically, those with higher literacy are more likely to have an emergency fund, and they are less likely to engage in credit card behavior that generates high interest payments and fees.

In addition, in this new wave of the study, we asked respondents if they were offered financial education at any point during their lives—and if they answered yes, we asked them if they participated in the financial education. What we found was that respondents who were offered and participated in financial education could answer more of the financial literacy questions correctly when compared to respondents who were not offered financial education or who were offered it but did not take advantage of it.

This is a very preliminary finding, and while more work needs to be done to establish if a causal relationship exists between financial education and financial literacy, these findings are at least promising and point in the right direction.

And this brings me to my last point—the study data can help us deepen our understanding of financial capability. That is why the FINRA Foundation makes all the datasets and supporting material available to researchers or other stakeholders. In fact, the ability to track trends over time and corroborate learnings from the 2009 data is an incredibly valuable characteristic of the National Financial Capability project. For example, using the 2009 data, researchers at the FINRA Foundation found that households without emergency savings are more likely to experience mortgage payment problems when faced with an income shock than those with emergency savings. By slicing and dicing the 2012 data, the researchers were able to replicate these findings. Using the study data in this fashion—that is, to corroborate earlier research results—enables the financial capability community to place more confidence in "what we know" about financial capability.

I'm hopeful these data will guide our collective efforts. At the FINRA Foundation, we engage in a variety of initiatives and partner with many of the organizations represented here today with just that goal in mind.

I'm particularly grateful that Stacey Stewart, the U.S. President of the United Way Worldwide, is here with us today. Through the Foundation's grantmaking partnerships with United Way and the American Library Association, we've worked to expand the capacity of community-based programs, and to share innovative grassroots program models.

We've seen, for example, that integrating financial education into existing programs where target audiences already congregate can prove very effective. Some of our grantees work personal finance into "English Language Learner" programs, GED prep, various workplace programs, homeowner education, and even story times at public libraries. These "outside-the-box" approaches tend to take root because people learn in different ways, have diverse demands on their time, and have competing priorities. How can we expect only one approach to financial education to work well for everyone? That strikes me as unreasonable and unproductive. And findings from the study underscore that financial capability in the U.S. varies greatly across a range of demographics.

So, through partners and grantees, we reach out where people are, listen carefully to their needs and aspirations, and respond in ways that are meaningful to them.

I'm pleased the study gives us an even deeper understanding of what our task is.

With that, I thank you for your time today and for your interest in improving financial capability in America.

I'd like to invite to the podium FINRA Foundation President Gerri Walsh who will introduce the next speaker and guide us through the rest of the event.